(iFAST Financial) Despite the tension over Iraq and a sluggish global economy, Emerging Market bonds had a good run in 2002. Last year the asset class returned 13.65% (as measured by the JP Morgan EMBI Global Diversified Index, a popular benchmark for Emerging Market bond funds). The momentum appears to be going strong this year, with the index close to matching that performance in the first 4 months of 2003. Much of those gains came in April, a very good month for the asset class, notes Mark Coombs, the Managing Director of Ashmore Investment Management in London. Ashmore is the sub-manager of the United Global Emerging Markets Portfolios (GEMS), a Singapore registered Emerging Market bond fund by UOB Asset Management. He reveals the GEMS fund is up 18% year-to-date, as at 30 April 2003.

Because of huge capital inflows into the asset class and the strong fundamentals underpinning several Emerging Markets, Coombs is confident that 2003 will be a strong year for the fund. "We always try and achieve 14% to 15%, and that is our annual average for the GEMS fund. Our average return on the EMLIP fund is around 20%. Of course, one should always be careful about what one says, but we feel relatively comfortable that this should be strong year and not a weak year for GEMS."

LATIN AMERICAN BONDS OFFER GOOD VALUE

The London-based fund manager confirms that the surge in performance in April 2003 was mostly the result of a strong rally in Latin American bonds. Buoyed by the quick execution of the war in Iraq, improving economic fundamentals, and an investor aversion to virus-hit Asian markets, Latin American bonds staged a powerful comeback from their beaten down levels last year.

Coombs remains upbeat on Latin American bonds despite its recent rally. He believes the run-up took place because investors recognised that Latin American bonds were very cheap. "I think that Latin America has a big regional opportunity to recover because it was heavily sold down last year, in a way that Asia and Eastern Europe weren't. It also has significant gearing to the US. If the US does well, then it will really race away. Even if the US is sluggish, it still should do okay."

UPBEAT OUTLOOK FOR EMERGING MARKET BONDS

Some of the fund's non-Latin American bets include Russia and, to a lesser extent, Algeria and Indonesia. Russian debt has done well for the fund in the past. Coombs says the fund has been taking profit and paring down its position there, as credit spreads tighten. The fund has 4.42% in Algeria, and Coombs cites the fast repayment of its debt as a very positive development there. It also has 6.59% in Indonesia, and that's because the economy has underlying growth potential, says the fund manager.

He adds the outlook for Emerging Market bonds appears positive, and should be supported by growth in some of the larger Emerging Markets. "We think the fundamentals are quite good for some of the larger borrowers. There is no immediate crisis in view, like there was before in the past couple of years. In 2001 it was Argentina that everyone was worried about, and last year it was Brazil. In 2003, we are looking at a year when nobody in particular has an Emerging Market crisis on the horizon."

RISKS

Coombs notes that one of the main risks for Emerging Markets is the health of the US economy. Several Latin American and Asian economies have substantial gearing to the US economy, and he says that a strong US recovery would be very good for them. "One of the things that will affect what happens in the wider world is the health of the US economy. If the US recovers strongly, then Asia will recover strongly on the back of it. There are parts of Asia that are not looking too healthy at the moment simply because they are major exporters to the US."